Spain bond sale costs soar toward danger levels

MADRID, Nov 17 - Spain paid the highest rate to sell its 10-year debt since 1997 Thursday, just shy of the 7 percent mark seen as unsustainable, as the country is swept deeper into the euro zone's debt crisis ahead of a Parliamentary election Sunday.

The euro fell and demand for safe haven German bonds jumped after auction as investor fears about the stability of the whole the currency bloc grew.

"The result was dreadful. They didn't manage to raise the full amount and the bid-to-cover is really poor. The fiscal profiles of Spain and Italy are different but their yields seem to be aligning now," said Achilleas Georgolopoulos, rates strategist at Lloyds in London.

Countries at the fringes of the euro zone saw their financing costs leap this week over fears Italy could eventually default, and the tensions spilled over into core euro zone countries such as France. That was despite ongoing support from the European Central Bank's bond purchases of periphery debt.

The Treasury managed to sell 3.6 billion euros of a new 10-year 5.85 percent coupon benchmark bond, in the middle of its 3 billion to 4 billion euro target at the auction.

Spain's government was forced to pay an average yield of 6.975 percent for the bond, the highest since 1997 when the average yield was 7.26 percent. The highest paid this year on a separate 5.5 percent coupon 10-year bond was 5.986 percent on July 21.

The bid-to-cover ratio in the Spanish auction, an indicator of investor demand, was 1.5, down from 1.8 in October for a similar bond.

A separate auction of saw France's cost of borrowing over two and four years jumped by around half a percentage point at an auction Thursday, reflecting growing concerns it may be dragged into the euro zone's sovereign debt crisis.

Spain faces a Parliamentary election Sunday, which polls show the center-right People's Party winning by a wide margin. Leader Mariano Rajoy will quickly be tasked with assuring markets Spain can take the right measures to avoid a bailout like Portugal.

(Reporting by Nigel Davies; Additional reporting by London government bonds desk; Editing by Fiona Ortiz)